Layers can be found just about everywhere you look these days. Planet earth is comprised of many layers. Food has its towering cakes and lasagna that are comprised of layers. In business, a company's strategy can and should have multiple layers. And, perhaps, unlike anywhere else, in the new universe of blockchains, digital assets and Cryptocurrencies, layers are absolutely central to the very blueprint of this new technological world. As we think about the digital realm that human beings are steadily migrating toward, the core pillars upon which the very first blockchains have been constructed are the bedrock principles of decentralization, scalability, and security. It is upon those three pillars that all the layers of the crypto universe are built and connected. Today, the crypto world is comprised of four primary layers with each layer singularly focused on four themes: foundation, scale, application, and interphase.
Setting The Foundation
Let's
begin with Layer 1, the foundation. Layer 1 is a common term in the vocabulary
of crypto because the first layer, the foundation, is where many of
the most recognized names in the industry
reside. Bitcoin and Ethereum are the closest things the
industry has to household names. They reside in Layer 1, but there are
lesser-known companies, such as Polkadot and Algorand, that also
make their home here. What they all have in common is that they are the
underlying, the foundational, blockchains upon which other layers of
technology in the crypto world may be constructed. There is not a
finite number of blockchains that could be considered as Layer 1, and
new entrants are bound only by the inherent value of their code. By the way, if
you can understand and grasp just these basic concepts of
the crypto world's Layer 1, you are likely to be the star of many a
dinner party conversation!
Scalability Ability
Layer
2 is comprised of technologies that are focused on, or specialize in,
accelerating the scalability of blockchains. Some of the most recognizable
and well-regarded companies now operating in Layer 2 include: Chainlink,
Plasma, Polygon and Lightning Network. What they all have in common is that
they are all technologies that are literally overlaid on
underlying blockchains. For example, Chainlink is overlaid on
the underlying Ethereum blockchain.
There's an App for That
Layer
3 is commonly referred to as the application layer. It consists of the
applications themselves as well as the technological protocols or standard
operating procedures that enable them to run on blockchains. I know, I
know, clear as mud!?! Try to think of Layer 3 as a Rosetta Stone of sorts that
enables the interoperability of digital technologies, or to continue with the
Rosetta Stone theme, to understand and translate each other's languages. Some
well-known categories of applications that reside in Layer 3 include:
decentralized exchanges (DEXs); decentralized finance (DeFI); non-fungible
tokens (NFTs);[PI18] stablecoins;
Central Bank Digital Currencies (CBDCs); and decentralized autonomous
organizations (DAOs).
They Are Just Going Through an Interphase
And last, but certainly not least, we have Layer 4. Layer 4 is often called the interphase layer, one of the fastest-growing segments of the crypto world, and is where you place decentralized application entities (dApps). UniSwap, IDEX, CryptoPunks, and MakerDAO are some of the most popular dApps that reside in Layer 4.
The
digital world may still be a mystery to many, but like our own physical world,
it is an ecosystem—an ecosystem that is constantly evolving, constantly
changing; an ecosystem that relies on the balance and cooperation of many
different elements to thrive, and, in the case of the digital world, it's all
about the layers!
As always, whether or not you are crossing the
digital divide with Rubicon Crypto…please remember to do so with common sense and
with Rational Exuberance.